Asian Currency Crisis Was No Stock Market Killer

In the past week, we’ve seen elevated volatility in global markets and a quick drop in U.S. stocks tracked by the SPDR S&P 500 (SPY), and the Down Jones Industrial Average tracking DIA.

It started with a currency devaluation in Argentina, as the central bank backed away from a fight to defend its currency from speculators. The Argentine peso declined by 17% in a day. Since then we’ve seen responses from central banks in Turkey and South Africa, all in an effort to fend of currency declines and curtail the flight of capital from their countries.

So the question is: Is this another crisis in emerging markets that could destabilize global markets, similar to the late 90s Asian currency crisis?

If we look back at the Asian crisis, what started in Thailand in the summer of 1997, as a currency devaluation of the baht, ultimately spread through the region, and culminated with a debt default in Russia.

This all sounds scary to most, I’m sure. And for that reason, some timid investors that have experienced a great rise in stocks immediately hit the sell button late last week. If everyone fears the comparisons to the Asian crisis, it should be said that stocks actually did well for a majority of the fallout in that period.

The problems started in July of 1997 in Thailand. The S&P 500 went on to rise another 26% from that date. And then in August of 1998, Russia devalued the Ruble and defaulted on its debt. That shook global markets and set off a flight to safety.

Only then, did global stocks correct. Most importantly, after an 18% decline in the S&P 500, within four months, the S&P was trading back to new highs (a full recovery in just four months).

Here’s the big takeaway from analyzing the impact of the Asian crisis on stocks. From the inception of the crisis in July of 1997, stocks nearly doubled in the next three years (+71%).

For more details on the current global market conditions, see my most recent Big Picture analysis (here).

Post Your Comment

Post Your Reply

Forbes writers have the ability to call out member comments they find particularly interesting. Called-out comments are highlighted across the Forbes network. You'll be notified if your comment is called out.

Comments

Bryan, good recounting of history. Today global financial markets are somewhat more interconnected than in the late 1990s. I would expect greater repercussion from problems in emerging markets, though I doubt this episode justifies doom and gloom thinking.